Offer and fund-raising underwriter through crowd funding platform

An underwriter is a regulated entity by the Securities and Exchange Commission, which operates a web platform allowing the possibility to make offerings through it; securities of various bidding companies, in a crowd funding financing model - investors receive shares or bonds in a company in which they have invested, in return for their investment.  Shareholders will be entitled to receive dividends from the company, and will be able to sell their securities and realize their investment (subject to legal limitations).  "Capital" mass financing is an emerging field in Israel, regulated by the Authority and regulated by the Securities Regulations (Proposal of Securities through an underwriter), 2017 ("Regulations"), as of December 27, 2017. 
 
"Capital" mass financing is an emerging field in Israel, regulated by the Authority and regulated by the Securities Regulations (Proposal of Securities through an underwriter), 2017 ("Regulations"), as of December 27, 2017.
What should a company do if it wishes to raise money through crowd funding ("an offering company ")?  Can it simply post such an offer on its website?  The regulations state that it cannot - an offering company cannot apply to the public directly.  Instead, it should turn to an "underwriter " - a company that operates a web platform (a website that offers crowd funding proposals), which enables it to offer securities through a crowd funding model.
 
The roles of the underwriter:

Apart from the initial role of coordinating the bids on the Internet platform, the underwriter has other important roles:  it is its responsibility to carry out various checks on the bids its publishes - to take reasonable measures to ensure that the bids are in compliance with the terms of the law and regulations and to avoid possible fraud in these bids. 
In addition, the underwriter needs to make sure that investors read the information and warnings before they can invest, and that they comply with the stipulations of the regulations.
  If the fund-raising is successful, the underwriter makes sure that the investors who responded to the offer are listed in the securities register.  The underwriter then allows the offering company to forward reports to its securities holders through the web platform it operates.
Important to pay attention!  Although the underwriter is required to take reasonable measures to verify that the proposal complies with the terms of the regulations and to prevent fraud in proposals made through it, it may, in this context, rely on representations and documents presented by the company, unless it has a reasonable basis not to trust its correctness. 
Therefore, the actions of the underwriter to check the projects do not necessarily allow full screening of frauds, and the various underwriters take different measures to meet these requirements.  Unlike public companies, which are directly supervised by the Authority, there is no direct oversight by the Authority on the companies offering securities through crowd funding.
 
Procedures:

The underwriter is required to establish and maintain procedures on various topics and publish them on the web platform it operates.  Some of them are presented as part of its annual report, which is also published on the platform.
An investor and entrepreneur wishing to act through the underwriter can read the procedures and estimate the actions that the underwriter is taking in each area. The procedures to be published include, inter alia, the manner in which proposals are selected, fraud prevention, document retention, documentation, data security and continuity of the underwriter's activities.
 
Limitations and Rules:

Offering companies can only offer shares or bonds to the public.

Nature of the offering companies 

The regulations do not impose restrictions on the type of offering companies, except the requirement that these shall be corporations incorporated in Israel. However, it is important to keep in mind that these are private companies rather than reporting corporations that are controlled by the Authority.  Usually, the offering companies are relatively small companies, which are at the beginning of their journey, and might be of different areas of activity. Offering companies can only offer to the public through the crowd funding financing model of shares or bonds.

Method of offering 

The offers on the underwriter's website are open for a certain period of time (called the “submission period"), and they must not fall below the minimum raising amount set in the offer documents.  The time that investors can submit securities purchase offers, is between 5 business days and 90 days, and as part of the offering, the offering company and the underwriter should determine and publish the time period they have set. At the end of the period, the underwriter checks to see if the company has been able to raise the full amount of funding requested. If so - the proceeds are transferred to the company. However, if not - the funds are returned to investors 

within 7 days. for example: A company advertises an offer of NIS 800,000 for the duration of 45 days. If NIS 800,000 is invested by the end of these 45 days - the money will be transferred to the company and in return, the investors will receive the securities; but, if only NIS 500,000 is invested by the end of the 45 days - all NIS 500,000 will be returned to investors.
It is important to note that both the offering company and the investors can withdraw from the offer / investment during the entire submission period.

Limitations of raising 

The regulations set limits on the amounts that can be raised and the amounts that can be invested through crowd funding. An offering company can raise through crowd funding up to a raising ceiling that ranges from NIS 4 to 6 million in a 12-month consecutive period (in one offering or several offerings). The basic maximum amount to raise is NIS 4 million. However, if a lead investor is participating in an offering, the company can raise an additional 1 million NIS a year, and if the company receives a review report from the Innovation Authority or the Small Business Agency, the amount increases in another 1 million NIS. 

Investment Limitations

The regulations set limits on each person's investment amounts. These restrictions are intended to protect investors who choose to invest in this way. The basic rule is that; an investor can invest up to NIS 10,000 in one bid, that is, shares or bonds of a particular company, and can invest in several offerings - as long as he/she does not invest more than NIS 20,000 in offerings made by all underwriters during 12 months.
If the investor's annual income is between NIS 350,100 and NIS 750,000, he can invest up to NIS 30,000 in one or several offers during 12 months.
If the investor's annual income is between NIS 750,100 and NIS 1,200,00, he/she can invest up to 5% of his / her annual income in one or several offers during a 12-month period.

Leading investor

The regulations define who can be a leading investor. For example - a venture capital fund or a person specializing in investing in companies in the field of the specialized company, that made at least 5 previous investments in private companies for at least NIS 2 million.

In order to be considered a leading investor, he/she must invest at least 10% of the total amount invested by the investors (under the same conditions or non-material differences). In addition, a leading investor should have no business or professional relationship with the offering company, for the two years prior to the offering.
As we can see, for investors - the existence of a leading investor should signal that a specialist with expertise has examined the offer and decided to invest in it. Therefore, the regulations state that if a lead investor joins the offer, the company can raise an additional NIS 1 million (beyond the permitted ceiling of NIS 4 million).
A report from the Innovation Authority or the Small and Medium Business Agency
An offering company can get an "Inspection report" from the Innovation Authority if it is engaged in research and development, or an "Inspection report" from the Small Business Agency if it is operating in a different field. The inspection report should include findings and conclusions that are specified in the regulations (for example, that it was not found that the business plan of the offering company is unreasonable).

An inspection report is an indication that an external party has examined the offering company and its activities (although it does not indicate the chances of the offering success or the offering company). Therefore, the regulations state that if a company gets an inspection report, it can raise an additional NIS 1 million (beyond the maximum limit of NIS 4 million).